Region's energy sector feels impact of coronavirus

The far-reaching social and economic effects of the coronavirus Covid-19 was inevitably going to impact on the region’s energy and utilities sectors..

The world is facing an unprecedented challenge for the current generation, with countries closing borders and stock markets falling by the day. S&P Global Ratings economists have already forecasted a global recession for 2020, predicting GDP growth to be 1 per cent to 1.5 per cent, as the global slump in demand affects cash flow across almost every industry.

With the number of cases continuing to grow at a rapid rate across increasingly broad geographies and continent, business considerations have taken a backseat as governments and companies seek to ensure the safety and wellbeing of citizens, employees and customers.

The postponement of the public bid opening of the commercial tariffs for the 1.5GW Dhafra solar independent power producer (IPP) project in Abu Dhabi on 18 March was unavoidable, with the majority of the GCC’s public and private sector working from home and discouraged from attending public gatherings. There will be plenty more delays and postponements of meetings and decisions in the coming months as governments seek to halt the spread of the pandemic.

The initial impact of the coronavirus on the Middle East region’s economies was felt in January as the virus took hold in China, with the ceasing of business activity across much of the world’s second largest economy. As the world’s largest importer of oil, the slowdown in the Chinese economy has significant repercussions in the Middle East, with 38 per cent of its oil imports, about 3.5 million barrels a day, due to come from the region in 2020.

The impact of the fall in demand has been exacerbated by the beginning of an oil price war between Saudi Arabia and Russia, which resulted from the collapse of the Opec+ alliance in early March. As a result of falling demand and a large increase in production from Saudi Arabia, the world’s largest producer, the brent crude oil price dropped below $30 a barrel on 16 March.

While Saudi Aramco has said it is “very comfortable” with oil at $30 and would continue elevated production though until May, lower oil prices will have a significant impact on the ability of the GCC states to press ahead with economic reform programmes and infrastructure development, with oil accounting for about 80 per cent of government revenues.

A recovery in the oil price will be critical to how quickly the region’s economies recover when new infections begin to drop, and businesses and industries begin to move back towards full operations.

The spread of the virus across the globe has led to a further curtailment of business activities. The lockdown of some of the world’s largest economies in Europe, and far-reaching restrictions on movement and activities in the US has led to an unprecedented slowdown of economic activity. Similar measures have been adopted across the Middle East over the past week, with Saudi Arabia, Kuwait and most recently Egypt announcing the closure of airports.

The longer-term impact of the coronavirus on the energy sector are already being debated, with concerns that ambitious renewable energy programmes could become a casualty of the lower oil price and a fall in supply of key materials and products from China. Others see an opportunity for governments to develop policies supporting renewables in economic responses to the coronavirus outbreak, which may spur on the development of clean energy when the pandemic subsides.

With defeating the coronavirus covid-19 to remain the focus for governments in the coming weeks and months, ensuring the supply of energy for those that need it most will be the priority for state utilities and private energy companies.